Private mortgage insurance (PMI) is an insurance policy that protects a lender that gives a mortgage to someone who has less than 20% of the purchase price to put down when buying the home. In the event that you were to default on mortgage payments this insurance policy is a way to protect the lender’s investment.
The private mortgage insurance payments are made monthly in conjunction to your monthly mortgage payments. The cost of private mortgage insurance will vary depending the loan amount and the down payment. Here is an example:
If you purhcase a home that is $200,000 and you have $15,000 to put down (7.5% of the sale price) your monthly mortgage payment would be roughly $884.00 and the PMI cost would be an additional $111.00 for a total of $995/month for your mortgage and PMI. This example does not include the additional cost of taxes and property insurance.
The purpose of PMI is to protect the lender in the event that you have a small down payment to put towards a home purchase. But before entering into a loan with PMI it’s important to understand what needs to be done to have the PMI removed.
According to the Consumer Financial Protection Bureau there are two ways to remove PMI.
When you receive your mortgage you will be given a date at which your mortgage amount will fall below 80% of the value of your home. If you are someone who has worked to make extra payments towards the principal balance of your loan, this date may come earlier then anticipated.
In order to remove the private mortgage insurance early you will be required to:
Providing you meet these requirements it should be no problem to cancel the PMI on your mortgage.
When your loan amount falls below 78% of your home value according to the terms listed in your original mortgage contract you will no longer have to pay PMI and it should be dropped from your monthly payment by your lender. If you wait until the agreement matures it will not be necessary to prove value with an appraisal. However if you are not in good standing with your lender and have fallen behind on payments the PMI will not be removed until after you’ve caught up on payments and are in good standing.
It is important to note that the terms of your PMI agreement will differ depending on the type of loan you get. For example a Veterans Affairs (VA) or Federal Housing Administration (FHA) loan will have their own rules and requirements for PMI.
If you are looking to buy a home make sure you work with your lender to obtain a pre-qualification and communicate how big you anticipate your down payment to be. They can explain your options and the most current private mortgage insurance facts.
At Title Mortgage we understand that not everyone has a 20% down payment towards their first home. That’s why we offer a variety of mortgage solutions for every type of buyer and we are committed to working closely with you to determine the best option for you! Contact us today at 603-643-1400.